Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure

ABSTRACT

We find that the majority of variation in leverage ratios is driven by an unobserved time‐invariant effect that generates
surprisingly stable capital structures: High (low) levered firms tend to remain as such for over two decades. This feature
of leverage is largely unexplained by previously identified determinants, is robust to firm exit, and is present prior to
the IPO, suggesting that variation in capital structures is primarily determined by factors that remain stable for long periods
of time. We then show that these results have important implications for empirical analysis attempting to understand capital
structure heterogeneity.